"You bought a limousine for $98,000 and are planning to rent it for weddings, ceremonies and parties at $245 per hour. If you estimate the car will be hired for 2 hours a day on average, with daily costs at about $50, what is the estimated yearly yield on your investment if you work all year round, i.e. every day of the year, including any festivities and weekends?",164%,1.64%,0.45%,183%,A
Arno Co. did not record a credit purchase of merchandise made prior to year end. However the merchandise was correctly included in the year-end physical inventory. What effect did the omission of reporting the purchase of merchandise have on Arno's balance sheet at year end? Assets Liabilities,No effect No effect,No effect Understated,Understated No effect,Understated Understated,B
Which of the following statements about audit sampling risks is correct for a nonissuer?,"Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population.",Nonsampling risk can arise because an auditor failed to recognize misstatements.,Sampling risk is derived from the uncertainty in applying audit procedures to specific risks.,Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.,B
Which of the following procedures would an auditor generally perform regarding subsequent events?,Inspect inventory items that were ordered before the year end but arrived after the year end.,Test internal control activities that were previously reported to management as inadequate.,Review the client's cutoff bank statements for several months after the year end.,Compare the latest available interim financial statements with the statements being audited.,D
The FASB makes changes to the Accounting Standards Codification by issuing,Accounting Standards Updates.,Emerging Issues Task Force Releases.,Statements of Financial Accounting Standards.,Staff Technical Bulletins.,A
"An investment project costing $500 today will generate profits of $500 in year five and year ten. If the discount rate is 10%, what is the project’s NPV?",−$3,−$27,$3,$500,C
On July 1 year 7 Dean Co. issued at a premium bonds with a due date of July 1 year 12. Dean incorrectly used the straight-line method instead of the effective interest method to amortize the premium. How were the following amounts affected by the error at June 30 year 12? Bond carrying Retained amount earnings,Overstated Understated,Understated Overstated,Overstated No effect,No effect No effect,D
"What is the price of a three-year bond (face value $100), paying 5% coupons, with a yield of 6%?",$100,$104.29,$96.71,$97.33,D
"A company recently moved to a new building. The old building is being actively marketed for sale, and the company expects to complete the sale in four months. Each of the following statements is correct regarding the old building, except:",It will be reclassified as an asset held for sale.,It will be classified as a current asset.,It will no longer be depreciated.,It will be valued at historical cost.,D
"Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. Carson accurately reported $28,000 in gross income on Carson’s individual tax return. If the corporation had been an S corporation and the distributions to the owners had been proportionate, how much income would Carson have reported on Carson’s individual return?","$28,000","$132,000","$160,000","$188,000",C
An investment will pay out $10 p.a. forever. What is that investment worth if the market discount rate is 5%?,$100,$2,$500,$200,D
"Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income?",$0,"$15,000","$20,000","$40,000",B
Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's accounting and auditing practice?,Engagement performance.,Risk analysis.,Safeguarding of assets.,Information processing.,A
"A company predicted that it would manufacture 10,000 units of finished goods during March. The direct labor standards indicated that each unit of finished goods requires 2.4 direct labor hours at a standard wage of $20 per hour, totaling $48.00 per finished good unit. During March, the company actually made 9,000 units of finished goods. Production used 2.5 labor hours per finished unit, and the company actually paid $21 per hour, totaling $52.50 per unit of finished product. What amount is the company's direct labor rate variance for March?","$18,000","$22,500","$25,000","$40,500",B
"The full-employment gross domestic product is $1.3 trillion, and the actual gross domestic product is $1.2 trillion. The marginal propensity to consume is 0.8. When inflation is ignored, what increase in government expenditures is necessary to produce full employment?",$100 billion,$80 billion,$20 billion,$10 billion,C
Which of the following types of audit evidence provides the least assurance of reliability?,Receivable confirmations received from the client’s customers.,Prenumbered receiving reports completed by the client’s employees.,Prior months’ bank statements obtained from the client.,Municipal property tax bills prepared in the client’s name.,B
During year 2 Pipp Co. incurred the following costs to develop and produce a routine low-risk computer software product: Completion of detailed program design $10000 Costs incurred for coding and testing to establish technological feasibility $15000 Other coding and testing costs incurred after establishment of technological feasibility $44000 In Pipp's December 31 year 2 balance sheet what amount should be capitalized as software cost?,"$10,000","$25,000","$44,000",59000,C
During an engagement to compile the financial statements of a nonissuer an accountant becomes aware that management had stated land at appraised value and that if GAAP had been followed both the land account and stockholders' equity would have been decreased by $1 million a material amount. The accountant decides to modify the standard compilation report because management will not revise the financial statements. Under these circumstances the accountant should,Issue either an adverse opinion or a qualified opinion depending on materiality because of the departure from GAAP.,Add a separate paragraph to the accountant's report that restricts the distribution of the financial statements to ‚Äúinternal use only.‚Äù,Add a separate paragraph to the accountant's report that discloses the departure from GAAP and its effects on the financial statements.,Add a separate paragraph to the accountant's report that explains the underlying purpose of recording assets at historical cost.,C
"Under the Sales Article of the UCC, which of the following circumstances best describes how the implied warranty of fitness for a particular purpose arises in a sale of goods transaction?",The buyer is purchasing the goods for a particular purpose and is relying on the seller’s skill or judgment to select suitable goods.,The buyer is purchasing the goods for a particular purpose and the seller is a merchant in such goods.,The seller knows the particular purpose for which the buyer will use the goods and knows the buyer is relying on the seller’s skill or judgment to select suitable goods.,The seller knows the particular purpose for which the buyer will use the goods and the seller is a merchant in such goods.,C
Before accepting an audit engagement a CPA should evaluate whether conditions exist that raise questions as to the integrity of management. Which of the following conditions most likely would raise such questions?,There are significant differences between the entity's forecasted financial statements and the financial statements to be audited.,The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management.,There have been substantial inventory write-offs just before the year end in each of the past four years.,The CPA becomes aware of the existence of related party transactions while reading the draft financial statements.,B
"In an e-commerce environment that requires that the information technology (IT) system be available on a continuous basis, more emphasis will be placed on which of the following aspects of the planning than in a traditional organization?",Maintain appropriate written source documents so the data can be re-entered if it is lost or compromised,Maintain redundant systems for instant availability to assure the flow of transactions,Review additional expenses to obtain the required amount of business interruption insurance coverage for the organization,Assure that appropriate data backups are stored in an off-site location,B
Spark Co. buys cordless phones for $125 each and sells them for $200 each. Spark pays a sales commission of $25 per phone sold and monthly fixed costs are $3000. Assuming Spark desired a profit of 10% of sales how many units must Spark sell?,600,400,200,100,D
Inherent risk and control risk differ from detection risk in which of the following ways?,Inherent risk and control risk are calculated by the client.,Inherent risk and control risk exist independently of the audit.,Inherent risk and control risk are controlled by the auditor.,Inherent risk and control risk exist as a result of the auditor’s judgment about materiality.,B
Ultra Co. uses a periodic inventory system. The following are inventory transactions for the month of January: 1/1 Beginning inventory 20000 units at $13 1/20 Purchase 30000 units at $15 1/23 Purchase 40000 units at $17 1/31 Sales at $20 per unit 50000 units Ultra uses the LIFO method to determine the value of its inventory. What amount should Ultra report as cost of goods sold on its income statement for the month of January?,"$710,000","$750,000","$830,000",1000000,C
"On day 1, Jackson, a merchant, mailed Sands a signed letter that contained an offer to sell Sands 500 electric fans at $10 per fan. The letter was received by Sands on day 3. The letter contained a promise not to revoke the offer but no expiration date. On day 4, Jackson mailed Sands a revocation of the offer to sell the fans. Sands received the revocation on day 6. On day 7, Sands mailed Jackson an acceptance of the offer. Jackson received the acceptance on day 9. Under the Sales Article of the UCC, was a contract formed?",No contract was formed because the offer failed to state an expiration date.,No contract was formed because Sands received the revocation of the offer before Sands accepted the offer,A contract was formed on the day Jackson received Sands’ acceptance,A contract was formed on the day Sands mailed the acceptance to Jackson,D
Elan Co. has two employees. Each employee receives two weeks of paid vacation each year. Vacation rights accumulate. One employee whose weekly salary is $600 took a two-week vacation during the year but the other employee who earns $800 per week took no vacation during the year. In its year-end financial statements what amount should Elan report as vacation liability and expense? Liability Expense,$1600 $1200,$1600 $2800,$0 $1200,$0 $2800,B
Which of the following statements is correct regarding the Federal Unemployment Tax Act?,An employee who resigns regardless of cause is eligible for unemployment benefits.,The federal unemployment system is funded by both employer and employee taxes.,The Act is intended to assist workers who are permanently out of work and need assistance in supporting themselves.,The unemployment insurance system is administered by the states through their employment laws.,D
"When the AQR partnership was formed, partner Acre contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a one-third interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership’s profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale?","Each partner reports a capital gain of $33,333.","The entire gain of $100,000 must be specifically allocated to Acre.","The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners.","The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.",D
The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to,Provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities.,Minimize the likelihood of associating with clients whose management lacks integrity.,Document the matters that are required to be communicated to the audit committee.,Enhance the auditor's understanding of the client's business and its industry.,B
"What is the price of a five-year bond (face value $100) that pays no coupons, if its yield is 4%?",$100,$85,$82,$75,C
Vital Corp. is an accrual-basis calendar-year C corporation. Its year 2 reported book income before federal income taxes was $500000. Included in that amount were the following items: Year 1 state franchise tax refund $50000 Municipal bond interest income 7500 What should be the amount of Vital's year 2 taxable income as reconciled on Vital's Schedule M-1 of Form 1120 U.S. Corporation Income Tax Return?,"$500,000","$492,500","$450,000",442500,B
"A practitioner is engaged to express an opinion on management’s assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?",Statements on Auditing Standards,Statements on Standards for Attestation Engagements,Statements on Standards for Accounting and Review Services,Statements on Standards for Consulting Services,B
Swift Co. has identified three operating segments that may require separate disclosure in Swift's general purpose financial statements for the year ended December 31 year 2. Information for year 2 follows: Segment (in thousands) A B C Total Reported revenue $ 42 $ 121 $ 14 $ 177 Reported profit(loss) $ 12 $ 65 $ (3) $ 74 Assets $ 470 $ 800 $ 80 $ 1350 Which of Swift's segments are required to be separately disclosed in its December 31 year 2 financial statements?,A and B only.,A and C only.,B and C only.,A B and C.,A
"When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should",Not refer to the change in the auditor’s report.,Refer to the note in the financial statements that discusses the change.,Refer to the change in an emphasis-of-matter paragraph.,Explicitly state whether the change conforms with GAAP.,A
"Long was a purchasing agent for Frost, a sole proprietor. Long had express authority to place purchase orders with Frost's suppliers. Long conducted business on the Internet and had little contact with Frost. After Frost was declared incompetent in a judicial proceeding, Long placed an order with Grant Corp. on Frost's behalf. Both Long and Grant were unaware of Frost's incompetence. Will Frost or Frost's legal representative be liable to Grant?","Yes, because Long's agency survived Frost's incompetence.","Yes, because the order was valid regardless of Frost's incompetence.","No, because Grant dealt only with Long.","No, because Long did not have authority to enter into the contract.",D
Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor’s competence?,The reporting status of the internal auditor within the organization.,The educational level and professional experiences of the internal auditor.,Whether policies prohibit the internal auditor from auditing areas where relatives are employed.,"Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor.",B
Which of the following procedures would an auditor most likely perform before the balance sheet? date?,Confirm with client's lawyer that all litigation probable of assertion has been disclosed to the auditor.,Obtain an understanding of the client's internal control activities.,Determine whether there are any liens or encumbrances on assets that have been pledged as collateral.,Consider the client's plans and ability to meet imminent purchase commitments and cash flow obligations.,B
"Securities A, B and C have an expected return of respectively 7%, 12% and 5%. What is the expected return of an equal weighted portfolio composed of Securities A and C?",10%,8.50%,6%,12%,C
"Lei-Feng, Inc.'s $100 par value preferred stock just paid its $10 per share annual dividend. The preferred stock has a current market price of $96 a share. The firm's marginal tax rate (combined federal and state) is 40 percent, and the firm plans to maintain its current capital structure relationship into the future. The component cost of preferred stock to Lei-Feng, Inc. would be closest to .",6 percent,6.25 percent,10 percent,10.4 percent,D
In the current year Poplar City paid $5000 interest and $20000 principal on its outstanding general obligation bonds. The payment was made from a debt service fund using cash transferred earlier the same year from the general fund. How should the city report the expenditures? General fund Debt service fund Permanent fund,$25000 $25000 $0,$0 $25000 $20000,$25000 $5000 $0,$0 $25000 $0,D
"A company exchanged land with an appraised value of $50,000 and an original cost of $20,000 for machinery with a fair value of $55,000. Assuming that the transaction has commercial substance, what is the gain on the exchange?",$0,"$5,000","$30,000","$35,000",C
An investment project cost $1 million to undertake and will deliver $2 million in five years’ time. The discount rate is 10%. What is the project’s NPV?,"$1,000,000","$300,000","$2,000,000","$242,000",D
Brown cosigned Royal's $50000 note to State Bank. If Royal is later adjudicated mentally incompetent what would be Brown's liability on the note?,Liable to pay State on the due date of the note.,Liable to pay State only if State first seeks payment from Royal.,Not liable to pay State because Royal's incompetency discharges Royal as a surety.,Not liable to pay State unless Brown was a compensated surety.,A
"On January 1, a company enters into an operating lease for office space and receives control of the property to make leasehold improvements. The company begins alterations to the property on March 1 and the company’s staff moves into the property on May 1. The monthly rental payments begin on July 1. The recognition of rental expense for the new offices should begin in which of the following months?",January.,March.,May.,July.,A
Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements?,There are unusual discrepancies between the entity's records and confirmation replies.,Management enforces strict budgetary controls over the entity's departmental supervisors.,Cash transactions are electronically processed and recorded leaving no paper audit trail.,The monthly bank reconciliation ordinarily includes several large outstanding checks.,A
"A taxpayer purchases and is the owner of an insurance contract on his own life and designates his two children as equal beneficiaries. The taxpayer makes all premium payments. How many gifts of property, if any, have been made for gift tax purposes?",Zero.,One.,Two.,Three.,A
The City of Windemere decided to construct several large windmills to generate electrical power. The construction was financed through a general residential property tax levy for the next ten years. Utility revenues are intended to offset all expenses associated with the windmills. The land for the windmills was donated to the city by a local farmer. The land from the farmer should be reported in which fund type?,Special revenue.,Capital projects.,Enterprise.,Permanent.,C
Decker a 62-year-old single individual sold his principal residence for the net amount of $500000 after all selling expenses. Decker bought the house 15 years ago and occupied it until it was sold. On the date of sale the house had a cost basis of $200000. Within six months Decker purchased a new house for $600000. What amount of gain should Decker recognize from the sale of the residence?,$0,"$50,000","$175,000",300000,B
To which of the following rights is a holder of a public corporation's cumulative preferred stock always entitled?,Conversion of the preferred stock into common stock.,Voting rights.,Dividend carryovers from years in which dividends were not paid.,Guaranteed dividends.,C
"According to the SEC, members of an issuer’s audit committee may not",Establish procedures for employees to anonymously report fraud.,Be responsible for the compensation of any registered public accounting firm employed by the registrant to provide an audit report.,"Accept any consulting, advisory, or other compensatory fee from the registrant for services other than as a member of the board.",Engage independent counsel as deemed necessary to carry out their duties.,C
"Order the following (risk, return) pairs from least to most favourable, assuming the perspective of a rational and risk-averse investor: (2,2),(2,3) and (4,2). Risk is measured in standard deviations and return in percentage. HINT: Imagine a scatter diagram with standard deviation on the x-axis and return on the y-axis.","(4,2),(2,2),(2,3)","(2,2),(2,3),(4,2)","(2,2),(4,2),(2,3)","(2,3),(2,2),(4,2)",A
Sussman Co. prepared cash-basis financial statements for the month ended January 31. A summary of Sussman's January activities follows: Credit sales of $5600. Collections of $1900 relating to January credit sales. Accrued salaries of $1200. By what amount will Sussman's cash-basis income for the month ended January 31 increase as a result of restating these activities to the accrual basis of accounting?,"$2,500","$3,700","$4,400",4900,A
"According to COSO, an effective approach to monitoring internal control involves each of the following steps, except",Establishing a foundation for monitoring.,Increasing the reliability of financial reporting and compliance with applicable laws and regulations.,Designing and executing monitoring procedures that are prioritized based on risks to achieve organizational objectives.,"Assessing and reporting the results, including following up on corrective action where necessary.",B
"A bond issued on June 1, year 1, has interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, year 1, is for a period of",Three months.,Four months.,Six months.,Seven months.,D
Which of the following is an important consideration when deciding the nature of tests to use in a financial statement audit?,Tests of details typically provide a low level of assurance.,Analytical procedures are an inefficient means of obtaining assurance.,The procedures to be applied on a particular engagement are a matter of the auditor’s professional judgment.,The use of tests of controls should be considered without regard to the level of assurance required.,C
On January 1 the partners' interest in capital profits and losses of Studio Partnership were: Partners Percentages Ross 15% Stone 35% Taylor 50% On April 9 Stone sold his entire interest to Taylor. For tax purposes which of the following statements is correct regarding Studio's status as a partnership?,Studio terminated as of January 1.,Studio terminated as of April 9.,Studio terminated as of December 31.,Studio did not terminate.,D
Which of the following is a major difference between the just-in-time (JIT) and traditional approaches to manufacturing?,The JIT approach usually involves a large number of suppliers while traditional approaches usually involve only a small number of suppliers.,The JIT approach requires centralized purchasing while traditional approaches encourage purchasing decisions by production employees.,The JIT approach uses a push-through system while traditional approaches use a pull-through system.,The JIT approach operates with low inventory levels while traditional approaches may operate with high inventory levels.,D
"On January 1, year 1, a company purchased equipment for $100 million. The equipment consists of four major components, of which two components comprise 80% of the total cost and each has a 20-year useful life. The remaining two components have costs of $10 million each; one of them has a useful life of four years, and the other has a useful life of five years. The company applies the cost model to the equipment and uses the straight-line method of depreciation. Under IFRS, what is the depreciation expense for the year ended December 31, year 1?","$4,000,000","$5,000,000","$8,000,000","$8,500,000",D
The fixed assets and related depreciation of a company are currently tracked on a password-protected spreadsheet. The information technology governance committee is designing a new enterprise-wide system and needs to determine whether the current fixed asset process should be included because the current system seems to be working properly. What long-term solution should the committee recommend?,Continuing to use the current spreadsheet process because there have been no issues in this area.,Developing a new fixed asset system to manage the assets and related depreciation,Purchasing a stand-alone fixed asset program for managing the assets and related depreciation,Adopting the fixed asset module of the new system for integration.,D
In selecting an appropriate sample for a substantive test the auditor most likely would stratify the population if the,Auditor suspects that management fraud has occurred during the year.,Desired assessed level of control risk is less than the prior year.,Technique to be used is attribute sampling.,Auditor plans to give greater representation to large recorded amounts.,D
Which of the following statements is correct regarding a shareholder‚Äôs right to inspect corporate books and records? The right,Is absolute.,Is conditioned upon the demanding shareholder owning at least $5000 worth of stock.,Requires that the demand to inspect be for a proper purpose.,Exists only when fraud or illegality is alleged.,C
Which of the following procedures does a CPA usually perform when reviewing the financial statements of a nonissuer?,Make inquiries of management concerning restrictions on the availability of cash balances.,Communicate deficiencies in the design of internal control to the entity's audit committee.,Examine trend analysis to determine the appropriateness of the CPA's assessment of detection risk.,Evaluate management's plans for dealing with negative trends and financial difficulties.,A
Star Co. is a retail store specializing in contemporary furniture. The following information is taken from Star's June budget: Sales $540000 Cost of goods sold 300000 Merchandise inventory‚ÄìJune 1 150000 Merchandise inventory‚ÄìJune 30 180000 Accounts payable for purchases‚ÄìJune 1 85000 Accounts payable for purchases‚ÄìJune 30 75000 What amount should Star budget for cash disbursements for June purchases?,"$260,000","$280,000","$320,000",340000,D
West is single has no dependents and does not itemize. West provides the following information regarding his current-year‚Äôs return: Long-term capital gain $15000 Percentage depletion in excess of property's adjusted basis 9000 Dividends from publicly-held companies 10000 What is the amount of West's AMT tax preference items?,"$9,000","$19,000","$24,000",34000,A
"A company’s first IFRS reporting period is for the year ended December 31, year 2. While preparing the year 2 statement of financial position, management identified an error in which a $90,000 loss accrual was not recorded. $40,000 of the loss accrual related to a year 1 event and $50,000 related to a year 2 event. What amount of loss accrual should the company report in its December 31, year 1, IFRS statement of financial position?",$0,"$40,000","$50,000","$90,000",B
A project should be accepted if the present value of cash flows from the project is,Equal to the initial investment.,Less than the initial investment.,Greater than the initial investment.,Equal to zero.,C
"Gulde’s tax basis in Chyme Partnership was $26,000 at the time Gulde received a liquidating distribution of $12,000 cash and land with an adjusted basis to Chyme of $10,000 and a fair market value of $30,000. Chyme did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was the amount of Gulde’s basis in the land?",$0,"$10,000","$14,000","$30,000",C
During the year Verity Co. purchased $200000 of Otra Co. bonds at par and $50000 of U.S. Treasury bills. Verity classified the Otra bonds as available-for-sale securities and the Treasury bills as cash equivalents. In Verity's statement of cash flows what amount should it report as net cash used in investing activities?,$0,"$150,000","$200,000",250000,C
Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement?,Disagreements between the predecessor auditor and management as to significant accounting policies and principles.,The predecessor auditor’s understanding of the reasons for the change of auditors,Facts known to the predecessor auditor that might bear on the integrity of management.,Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.,D
"As of December 1, year 2, a company obtained a $1,000,000 line of credit maturing in one year on which it has drawn $250,000, a $750,000 secured note due in five annual installments, and a $300,000 three-year balloon note. The company has no other liabilities. How should the company’s debt be presented in its classified balance sheet on December 31, year 2 if no debt repayments were made in December?","Current liabilities of $1,000,000; long-term liabilities of $1,050,000","Current liabilities of $500,000; long-term liabilities of $1,550,000","Current liabilities of $400,000; long-term liabilities of $900,000","Current liabilities of $500,000; long-term liabilities of $800,000",C
Grant Co.'s sales budget shows the following projections for the year ending December 31: Quarter Units First 30000 Second 40000 Third 22500 Fourth 27500 Total 120000 Inventory at the beginning of the year was budgeted at 9000 units. The quantity of finished goods inventory at the end of each quarter is to equal 30% of the next quarter's budgeted sales of units. What amount should the production budget show for units to be produced during the first quarter?,36000,33000,24000,12000,B
"Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group termlife insurance at twice Johnson’s salary. The annual IRS established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income?","$100,000","$100,276","$100,414","$100,552",C
Vale is a 50% partner in Ball Partnership. Vale's tax basis in Ball on January 2 year 1 was $60000. Ball did not have unrealized receivables appreciated inventory or properties that had been contributed by its partners. On December 31 year 1 Ball made a $10000 nonliquidating cash distribution to each partner. The Ball Partnership income tax return reported the following items for year 1: Tax-exempt interest income $80000 Dividend income 12000 What total amount of gross income from Ball should be included in Vale's year 1 adjusted gross income?,"$6,000","$16,000","$36,000",46000,A
"While performing an audit of the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company’s sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor’s initial indication about the potential for fraud in sales revenue?",There is a broad indication of misappropriation of assets.,There is an indication of theft of the entity’s assets.,There is an indication of embezzling receipts.,There is a broad indication of financial reporting fraud.,D
"If a warrant carries a right to buy one share of common stock and is exercisable at $20 per common share while the market price of a share is $30, the theoretical value of the warrant is:",$20.00,$10.00,$5.00,$0.00,B
Which of the following sampling methods would an auditor use to estimate a numerical measurement of a population such as the dollar value of inventory?,Variable sampling.,Discovery sampling.,Attribute sampling.,Random-number sampling.,A
"After reviewing the end-user computing (EUC) policy of an organization, an internal auditor audits the actuarial function and notices that some minimum control requirements are missing. Which of the following is a risk of using potentially incorrect enduser developed files?",Management places the same degree of reliance on the files as they do on files generated from mainframe systems.,Management receives limited information for decision making due to a lack of flexibility in EUC files.,Management is unable to respond to competitive pressures quickly.,Management continues to incur additional cost because it takes more hours to do the tasks using EUC.,A
Which of the following events most likely would indicate the existence of related party transactions?,Insuring the lives of key executives and listing the entity as beneficiary.,Selling real estate at a price that differs significantly from its appraised value.,Making a loan with specific scheduled terms for repayment of the funds.,Granting stock options to key executives at favorable prices.,B
Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to accumulated depreciation accounts in the current year?,Prior years’ depreciation expenses were erroneously understated.,Current year’s depreciation expense was erroneously understated.,The estimated remaining useful lives of plant assets were revised upward.,Plant assets were retired during the current year.,D
Zokro a nongovernmental not-for-profit organization uses the indirect method to prepare its statement of cash flows. In determining its net cash provided (used) by operating activities Sokro must add back which of the following to the change in net assets?,Purchase of equipment.,Payment on long-term debt.,Depreciation.,Decrease in accounts payable.,C
A company’s new time clock process requires hourly employees to select an identification number and then choose the clock-in or clock-out button. A video camera captures an image of the employee using the system. Which of the following exposures can the new system be expected to change the least?,Fraudulent reporting of employees’ own hours.,Errors in employees’ overtime computation,Inaccurate accounting of employees’ hours.,Recording of other employees’ hours.,B
A CPA prepared a tax return that involved a tax shelter transaction that was disclosed on the return. In which of the following situations would a tax return preparer penalty not be applicable?,There was substantial authority for the position.,It is reasonable to believe that the position would more likely that not be upheld.,There was a reasonable possibility of success for the position.,There was a reasonable basis for the position.,B
Ace Co. issued 1000 shares of its $10 par value common stock for $15 per share in cash. How should this transaction be reported in Ace's statement of cash flows for the year of issuance?,$15000 cash inflow from financing activities.,$10000 cash inflow from financing activities and $5000 adjustment to arrive at cash flows from operating activities.,$15000 cash flow from investing activities.,$10000 cash flow from investing activities and $5000 adjustment to arrive at cash flows from operating activities.,A
Toft Co. had 120000 shares of common stock outstanding at January 1. On April 1 it issued 40000 additional shares of common stock. Outstanding all year were 10000 shares of nonconvertible preferred stock on which a dividend of $5 per share was declared during the year. Net income for the year was $480000. What should Toft report as earnings per share for the year?,$2.69,$2.87,$3.00,3.2,B
Smile Inc. purchased a computer on May 1 for $12000 with an estimated salvage value of $1500 and a 3-year life. What is the depreciation expense for the year ended December 31 using the double-declining method of depreciation?,"$8,000","$7,000","$5,333",4667,C
"During an engagement to review the financial statements of a nonissuer, an accountant becomes aware of several leases that should be capitalized, but are not capitalized. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should",Issue an adverse opinion because of the departure from GAAP.,Express no assurance of any kind on the entity's financial statements.,Emphasize that the financial statements are for limited use only.,Disclose the departure from GAAP in a separate paragraph of the accountant's report.,D
Cobb Inc.'s inventory at May 1 consisted of 200 units at a total cost of $1250. Cobb uses the periodic inventory method. Purchases for the month were as follows: Date No. of Units Unit cost Total Cost May 4 20 $5.80 $116.00 May 17 80 $5.50 $440.00 Cobb sold 10 units on May 14 for $120. What is Cobb's weighted average cost of goods sold for May?,$60.20,$62.10,$62.50,65,A
The following information pertains to Dash Co.'s utility bills: Period covered Amount Date paid April 16 ‚Äì May 15 $5000 June 1 May 16 ‚Äì June 15 $6000 July 1 June 16 ‚Äì July 15 $8000 August 1 What is the amount that Dash should report as a liability in its June 30 balance sheet?,"$6,000","$7,000","$10,000",14000,C
"A spouse died on December 31, year 1. The couple had no dependents. What should be the filing status of the surviving spouse in year 2?",Single.,Married filing jointly.,Qualifying widow(er).,Head of household.,A
A company that produces a single product using a continuous process had no work in process on April 1. During the month of April 10000 units were started and 9000 completed units were transferred. The ending work-in-process inventory was complete as to materials and 50% complete as to conversion. The cost of direct materials was $114000 and the cost of direct labor amounted to $38000. Manufacturing overhead is assigned at the rate of 50% of direct materials. For the purpose of determining the cost of goods manufactured in April what is the cost per equivalent whole unit?,$23.22,$21.40,$20.90,15.4,B
"What is the due date of a federal estate tax return (Form 706), for a taxpayer who died on May 15, year 2, assuming that a request for an extension of time is not filed?","September 15, year 2.","December 31, year 2.","January 31, year 3.","February 15, year 3.",D
On July 1 Alto Co. split its common stock 5 for 1 when the fair value was $100 per share. Prior to the split Alto had 10000 shares of $10 par value common stock issued and outstanding. After the split the par value of the stock,Remained at $10.,Was reduced to $8.,Was reduced to $5.,Was reduced to $2.,D
In performing substantive tests regarding the granting of stock options to senior management of an issuer an auditor most likely would,Confirm with those members of management as to whether they are actually option holders.,Verify the existence of option holders in the issuer's payroll and human resources records.,Trace the authorization for the options granted to the board of directors' approval.,Review the public records of the SEC to determine whether the options were properly reported.,C
If the objective of an auditor's test of details is to detect the overstatement of sales the auditor should trace transactions from the,Sales journal to the shipping documents.,Shipping documents to the cash receipts journal.,Cash receipts journal to the customer's purchase orders.,Customer's purchase orders to the sales journal.,A
Which of the following methods should be used to account for research and development costs with no alternative future use?,Charging all costs to expense when incurred.,Capitalizing all costs when incurred.,Capitalizing costs specified by management and charging all other costs to expense.,Accumulating all costs in a separate component of stockholders' equity until the existence of future benefits can be determined.,A
"Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability’s fair value, except",Quoted prices for identical assets and liabilities in markets that are not active,Quoted prices for similar assets and liabilities in markets that are active,Internally generated cash flow projections for a related asset or liability,Interest rates that are observable at commonly quoted intervals,C
Which of the following pricing policies results in establishment of a price to external customers higher than the competitive price for a given industry?,Collusive pricing,Dual pricing,Predatory pricing,Transfer pricing,A
What term is used to represent unavoidable past costs that cannot be changed no matter what action is taken?,Prime costs,Sunk costs,Opportunity costs,Incremental costs,B
Which of the following is considered part of the required supplementary information for general purpose external financial reporting of a local government?,Fund financial statement.,Combining nonmajor fund statement.,Notes to the financial statements.,Management discussion and analysis.,D
The simple linear regression between stock and market returns,fits the errors to obtain a more precise estimate of the stock’s beta.,"minimises the stock’s alpha, i.e. its idiosyncratic component.",estimates the alpha of stock returns and their dependence on the market returns.,models market returns as a function of the stock returns and its beta.,C
Which of the following financial instruments may be considered a derivative financial instrument?,Option contract.,Municipal bond.,Bank certificate of deposit.,Money market fund.,A
"When an accountant compiles projected financial statements, the accountant’s report should include a separate paragraph that",Disclaims any form of assurance on the historical financial statements.,Expresses limited assurance that the results will be within the projected range.,Describes the limitations on the usefulness of the projection.,Evaluates the hypothetical assumptions used to prepare the projection.,C
"Adam Smith is considering automating his pin factory with the purchase of a $475,000 machine. Shipping and installation would cost $5,000. Smith has calculated that automation would result in savings of $45,000 a year due to reduced scrap and $65,000 a year due to reduced labor costs. The machine has a useful life of 4 years and falls in the 3-year property class for MACRS depreciation purposes. The estimated final salvage value of the machine is $120,000. The firm's marginal tax rate is 34 percent. The incremental cash outflow at time period 0 is closest to","$280,000.00","$380,000.00","$480,000.00","$580,000.00",C
"If requested to perform a compilation engagement for a nonissuer in which an accountant has an immaterial direct financial interest, the accountant is",Independent because the financial interest in the nonissuer is immaterial.,"Not independent and, therefore, may not be associated with the financial statements.","Not independent and, therefore, may not issue a compilation report.","Not independent and, therefore, may issue a compilation report, but may not issue a review report.",D
Aston and Becker are equal partners in AB Partnership. In the tax year the ordinary income of the partnership is $20000 and the partnership has a long-term capital gain of $12000. Aston's basis in AB was $40000 and he received distributions of $5000 during the year. What is Aston's share of AB's ordinary income?,"$10,000","$15,000","$16,000",18500,A
Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer?,Make inquiries of management about actions taken at board of directors' meetings.,Study the relationships of financial statement elements expected to conform to predictable patterns.,Identify internal control activities that are likely to prevent or detect material misstatements.,Compare the financial statements with anticipated results in budgets and forecasts.,C
A compilation of financial statements in accordance with Statements on Standards for Accounting and Review Services is limited to presenting,Accounting data that conforms with a special purpose framework other than GAAP.,Unaudited financial statements that omit substantially all required GAAP disclosures.,Information in the form of financial statements that is the representation of management.,Supplementary financial information that has been subjected to inquiry and analytical procedures.,C
"Stock A has a beta of 0.8, while Stock B has a beta of 1.4. The expected return on the market is 10% and the risk-free rate is 7%. Using CAPM and this stock information, what is the required rate of return for Stocks A and B, respectively?",9.4% and 11.2%,−2.6% and 4.9%,4.3% and 7.4%,6.4% and 10.5%,A
Darv Co. had a current ratio of 3-to-1 and a quick ratio of 1-to-1. Current liabilities were $322000. What was the total amount for inventory and prepaid expenses?,"$322,000","$644,000","$966,000",1288000,B
Which characteristic of information in the statistical tables included in a comprehensive annual financial report differentiates it from information contained in the financial statements? Data covering financial trends Fiscal years,Yes Yes,Yes No,No Yes,No No,A
Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification?,A proposed statement of position.,A proposed accounting standards update.,A proposed accounting research bulletin.,A proposed staff accounting bulletin.,B
"In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary’s functional currency is the currency",In which the subsidiary maintains its accounting records.,Of the country in which the subsidiary is located.,Of the country in which the parent is located.,Of the environment in which the subsidiary primarily generates and expends cash.,D
"Within the COSO Internal Control—Integrated Framework, which of the following components is designed to ensure that internal controls continue to operate effectively?",Control environment.,Risk assessment.,Information and communication.,Monitoring.,D
"Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $.50 par common stock, when the market price was $10 per share. The option expired in three months and had an exercise price of $9 per share. What was the intrinsic value of the call option at the time of initial investment?",$50,$100,$200,$900,B
The Internal Revenue Code and the Regulations do not impose penalties on tax return preparers for which of the following?,Failure to sign a prepared tax return as a tax preparer.,Failure to provide a copy of a prepared tax return to the taxpayer.,Failure to notify a taxpayer about an inadvertent error on a tax return filed 10 years ago.,Failure to retain copies of prepared tax returns or a list of taxpayers for whom such returns were prepared for the last three years.,C
"If an auditor includes an emphasis-of-matter paragraph to draw users' attention to a matter relevant to the users' understanding of the financial statements of a nonissuer, then the auditor should",Indicate in the audit report that the emphasis-of-matter paragraph is required by law or regulation.,Notify the appropriate regulatory authority if the auditor's opinion was modified on the basis of the matter.,Modify the introductory paragraph to direct the reader to the emphasis-of-matter paragraph.,Include the paragraph immediately after the opinion paragraph in the audit report.,D
"To which of the following parties will a CPA be liable if the CPA fraudulently issues an unqualified opinion on a corporation's materially misstated financial statements? Corporate shareholders, Corporate bondholders",Yes Yes,Yes No,No Yes,No No,A
Which of the following statements regarding an individual’s suspended passive activity losses is correct?,"$3,000 of suspended losses can be utilized each year against portfolio income.","Suspended losses can be carried forward, but not back, until utilized.",Suspended losses must be carried back three years and forward seven years.,A maximum of 50% of the suspended losses can be used each year when an election is made to forgo the carryback period.,B
Brill Co. made the following expenditures relating to Product X: Labor and material costs incurred in producing a prototype $100000 Cost of testing the prototype $40000 Legal costs to file a patent $5000 Production of Product X commenced when the patent was granted. What amount of the above costs should be expensed as research and development costs?,"$40,000","$100,000","$140,000",145000,C
"While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?",Move detailed analytical procedures from year-end to interim.,Increase the dollar threshold of vouching customer invoices,Send negative accounts receivable confirmations instead of positive accounts receivable confirmations,Use more experienced audit team members to perform year-end testing,D
"An auditor has substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstances, the auditor would be most concerned about the",Control environment factors that affect the organizational structure.,Correlation of detection risk and inherent risk.,Effectiveness of the entity’s internal control activities.,Possible effects on the entity’s financial statements.,D
The statement of activities in the government-wide financial statements includes which of the following?,Separate columns for governmental activities business-type activities and discretely presented component units.,Separate columns for each major governmental fund.,Separate columns for each nonmajor governmental fund.,A separate section at the bottom of the statement that shows program and general revenues.,A
Which of the following statements should be included in a practitioner’s report on the application of agreed-upon procedures?,A statement that the practitioner performed an examination of prospective financial statements.,A statement of scope limitation that will qualify the practitioner’s opinion.,A statement referring to standards established by the AICPA.,A statement of negative assurance based on procedures performed.,C
"A $500 par-value convertible debenture is selling at $520. If the conversion ratio is 20, what is the conversion price?",$19.23,$20.18,$25.00,$26.00,C
Which of the following is an essential element of the audit trail in an electronic data interchange (EDI) system?,An integrated test facility that verifies the accuracy of data.,A heuristic program that accesses remote locations.,Hardware security modules that store sensitive data.,Computer activity logs that indicate failed transactions.,D
"A company has income after tax of $5.4 million, interest expense of $1 million for the year, depreciation expense of $1 million, and a 40% tax rate. What is the company’s times-interest-earned ratio?",5.4,6.4,7.4,10,D
The essence of responsibility accounting is,Developing performance reports emphasizing costs and revenues that managers can control.,Allocating service department costs to production departments so that production department managers know all costs for which they are responsible.,Determining who is to blame for unfavorable variances.,Investigating all variances regardless of their status as favorable or unfavorable.,A
Mast Co. converted from the FIFO method for inventory valuation to the LIFO method for financial statement and tax purposes. During a period of inflation would Mast's ending inventory and income tax payable using LIFO be higher or lower than FIFO? Ending inventory Income tax payable,Lower Lower,Higher Higher,Lower Higher,Higher Lower,A
A company should recognize goodwill in its balance sheet at which of the following points?,Costs have been incurred in the development of goodwill.,Goodwill has been created in the purchase of a business.,The company expects a future benefit from the creation of goodwill.,The fair market value of the company’s assets exceeds the book value of the company’s assets.,B
"An individual paid taxes 27 months ago, but did not file a tax return for that year. Now the individual wants to file a claim for refund of federal income taxes that were paid at that time. The individual must file the claim for refund within which of the following time periods after those taxes were paid?",One year.,Two years.,Three years.,Four years.,B
Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's auditing practice?,Acceptance of a client relationship.,Professional skepticism of management.,Computer information processing.,Efficiency of organizational structures.,A
"In year 6, an IRS agent completed an examination of a corporation’s year 5 tax return and proposed an adjustment that will result in an increase in taxable income for each of years 1 through year 5. All returns were filed on the original due date. The proposed adjustment relates to the disallowance of corporate jet usage for personal reasons. The agent does not find the error to be fraudulent or substantial in nature. Which of the following statements regarding this adjustment is correct?",The adjustment is improper because an agent may only propose adjustments to the year under examination.,The adjustment is proper because there is no statute of limitations for improperly claiming personal expenses as business expenses,"The adjustment is proper because it relates to a change in accounting method, which can be made retroactively irrespective of the statute of limitations.",The adjustment is improper because the statute of limitations has expired for several years of the adjustment,D
Hall Co. purchased a machine on January 1 at a cost of $140000. The machine had an estimated useful life of eight years and a salvage value of $60000. Hall chose to depreciate the machine using the double- declining balance method. What was the carrying amount of the machine in Hall's balance sheet at the end of its second year of operations?,"$60,000","$61,250","$78,750",80000,C
Large City does not use the modified approach to account for roads. At the beginning of the current year the city spent $800000 on new roads. The roads have a 20-year useful life. What amount should Large City report as an expense related to the new roads in the statement of activities for the current year?,$0,"$20,000","$40,000",800000,C
Corbet Co. purchased a copyright near the beginning of the current year from an author for $20000. The legal life of the copyright is equivalent to the life of the author plus 50 years. Corbet expects to sell the book for five years. What amount should Corbet report as amortization expense related to the copyright at the end of the current year?,$0,$400,$500,4000,D
"The sole shareholder of an S corporation contributed equipment with a fair market value of $20,000 and a basis of $6,000 subject to $12,000 liability. What amount is the gain, if any, that the shareholder must recognize",$0,"$6,000","$8,000","$12,000",B
Carter Co. had the following items on its balance sheet at the end of the current year: Cash and cash equivalents $ 200000 Short-term investments 100000 Accounts receivable 400000 Inventories 600000 Patent‚Äì10 years 300000 Equipment 1000000 Accumulated depreciation 200000 The amount of current liabilities at the end of the current year was $640000. What is Carter's working capital at the end of the current year?,"$60,000","$560,000","$660,000",960000,C
If a CPA recklessly departs from the standards of due care when conducting an audit the CPA will be liable to third parties who are unknown to the CPA under the law of,Strict liability.,Breach of contract.,Negligence.,Gross negligence.,D
"Given a 10% discount rate with cash inflows of $3,000 at the end of each year for five years and an initial investment of $11,000, what is the net present value?","-$9,500",$370,"$4,000","$11,370",B
Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?,The audit committee's approval of the initial selection of accounting principles.,A lack of competition in the entity's industry accompanied by increasing profit margins.,Management's disclosure of unresolved litigation and contingent liabilities.,Year-end adjustments by the entity that significantly affect financial results.,D
Which of the following techniques effectively measures improvements in product quality as a result of internal failure costs?,Inspection of in-process goods.,Recording the number of products returned over time.,Tracking the number of products reworked.,Tracking warranty expenses over time.,C
A CPA prepares a client’s tax return containing business travel expenses without inquiring about the existence of documentation for the expenses. Which statement best describes the consequence of the CPA’s lack of inquiry?,The CPA may be assessed a tax return preparer penalty.,The CPA may be charged with preparing a fraudulent return,The client will not owe an understatement penalty if the return is audited and the expenses disallowed,The client will not be subject to a fraud penalty,A
Which of the following is the proper treatment of the cost of equipment used in research and development activities that will have alternative future uses?,Expensed in the year in which the research and development project started.,Capitalized and depreciated over the term of the research and development project.,Capitalized and depreciated over its estimated useful life.,"Either capitalized or expensed, but not both, depending on the term of the research and development project.",C
"King, Inc. owns 70% of Simmon Co’s outstanding common stock. King’s liabilities total $450,000, and Simmon’s liabilities total $200,000. Included in Simmon’s financial statements is a $100,000 note payable to King. What amount of total liabilities should be reported in the consolidated financial statements?","$520,000","$550,000","$590,000","$650,000",B
Confirmation of accounts receivable that have been categorized initially by an auditor as ‚Äúexceptions‚Äù most likely could be due to,Customers who have credit or zero balances with the client.,Responses that were mailed rather than faxed to the auditor.,Accounts receivable that have been classified as uncollectible.,Payments mailed to the client that have not been recorded.,D
Accrual accounting involves accruals and deferrals. Which of the following best describes accruals and deferrals?,Accruals are concerned with expected future cash receipts and payments while deferrals are concerned with past cash receipts and payments.,Accruals are concerned with past cash receipts and payments while deferrals are concerned with expected future cash receipts and payments.,Both accruals and deferrals are concerned with expected future cash receipts and payments.,Both accruals and deferrals are concerned with past cash receipts and payments.,A
An accountant has been engaged to compile a nonissuer's financial statements that contain several misapplications of accounting principles and unreasonable accounting estimates. Management is unwilling to revise the financial statements and the accountant believes that modification of the standard compilation report is not adequate to communicate the deficiencies. Under these circumstances the accountant should,Disclaim an opinion on the financial statements and advise the board of directors that the financial statements should not be relied upon.,Inform management that the engagement can proceed only if distribution of the accountant's compilation report is restricted to internal use.,Determine the effects of the deficiencies and add a separate paragraph to the compilation report that describes the deficiencies and their effects.,Withdraw from the compilation engagement and provide no further services concerning these financial statements.,D
Which of the following cannot be amortized for tax purposes?,Incorporation costs.,Temporary directors’ fees.,Stock issuance costs.,Organizational meeting costs.,C
What is the process by which products and services of a business entity are measured and evaluated relative to the best possible levels of performance?,Measuring the performance gap,Standard measurement,Benchmarking,Variance management,C
The expected selling price for a new product is $19.00. Management's goal is to obtain a 20% contribution margin on all sales. If the new product has variable selling and distribution costs of $3.00 per unit what is the product's target variable manufacturing cost?,$12.20,$12.80,$15.80,18.2,A
Mill Co. reported pretax income of $152500 for the year ended December 31. During the year-end audit the external auditors discovered the following errors: Ending inventory $30000 overstated Depreciation expense $64000 understated What amount should Mill report as the correct pretax income for the year ended December 31?,"$58,500","$118,500","$186,500",246500,A
Which of the following defenses is likely to be successful in a suit alleging negligence by a CPA?,Due care.,Ignorance of the law.,Lack of intent.,Lack of mental capacity.,A
"On May 1 of the prior year, Baker purchased equipment with a five-year useful life for a cost of $10,000. Baker adopted the MACRS depreciation system and did not utilize any special depreciation deductions. On March 1 of the current year, Baker sold the equipment. The MACRS depreciation schedule for five-year property is listed below:
First year - 20.00%
Second year - 32.00%
Third year - 19.20%
What amount of depreciation can Baker deduct in the current year?",$533,"$1,600","$2,000","$3,200",B
"An entity engaged an accountant to review its financial statements in accordance with Statements on Standards for Accounting and Review Services. The accountant determined that the entity maintained its accounts on a comprehensive basis of accounting other than generally accepted accounting principles (GAAP). In this situation, the accountant most likely would have taken which of the following actions?",Withdrawn from the engagement because the entity has not been following GAAP.,Advised management to make the adjustments necessary for the account balances to conform with GAAP.,Modified the review report to reflect the fact that the financial statements were presented on another comprehensive basis of accounting.,Requested that management justify the use of the other comprehensive basis of accounting in the management representation letter.,C
The city of Cobb has two trust funds for the benefit of the city's library trust fund A and trust fund B. Only the earnings from trust fund A can be expended and both the principal and interest from trust fund B can be expended. How should the city of Cobb report each trust fund? Trust fund A Trust fund B,Permanent Permanent,Permanent Special revenue,Special revenue Permanent,Special revenue Special revenue,B
"A firm's inventory turnover (IT) is 5 times on a cost of goods sold (COGS) of $800,000. If the IT is improved to 8 times while the COGS remains the same, a substantial amount of funds is released from or additionally invested in inventory. In fact,","$160,000 is released.","$100,000 is additionally invested.","$60,000 is additionally invested.","$60,000 is released.",D
Which of the following statements would most likely appear in an auditor's engagement letter?,Management is responsible for reporting to us any inadequate provisions for the safeguarding of assets.,We will identify internal controls relevant to specific assertions that may prevent or detect material misstatements.,Management agrees to correct all deficiencies in internal control activities identified by us.,Management is responsible for making all financial records and related information available to us.,D
Which of the following factors most likely would cause a CPA not to accept a new audit engagement?,Management reputation for failing to provide schedules to prior auditors on a timely basis.,The CPA's inability to review the predecessor auditor's working papers.,Management's unwillingness to make all financial records available to the CPA.,The CPA's lack of understanding of the entity's operations and industry.,C
Which of the following pairs of elements must a client prove to hold an accountant liable for common law fraud?,Material misrepresentation and breach of contract.,Freedom from contributory negligence and loss.,Scienter and justifiable reliance.,Intent to deceive and privity.,C
A corporate taxpayer plans to switch from the FIFO method to the LIFO method of valuing inventory. Which of the following statements is accurate regarding the use of the LIFO method?,"In periods of rising prices, the LIFO method results in a lower cost of sales and higher taxable income, when compared to the FIFO method.",The taxpayer is required to receive permission each year from the Internal Revenue Service to continue the use of the LIFO method.,The LIFO method can be used for tax purposes even if the FIFO method is used for financial statement purposes.,"Under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods.",D
Lemon owned 2000 shares of Spectrol Corp. common stock that were purchased in year 1 at $10.50 per share. In year 4 Lemon received a 5% non-taxable dividend of Spectrol common stock. In year 5 the stock split 2-for-1. In the current year Lemon sold 800 shares. What is Lemon's basis in the 800 shares of stock sold?,"$4,000","$8,000","$8,400",16800,A
"Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in:",an increase in the average collection period.,a decrease in bad debt losses.,an increase in sales.,higher profits.,A
Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements arising from fraudulent financial reporting?,The entity's industry is experiencing declining customer demand.,Employees who handle cash receipts are not bonded.,Bank reconciliations usually include in-transit deposits.,Equipment is often sold at a loss before being fully depreciated.,A
An auditor is selecting prenumbered purchase orders for testing an entity's internal control activities related to their proper approval before office equipment is ordered. The auditor is matching random numbers with the purchase order numbers to determine which purchase orders to inspect. If a random number matches a voided purchase order the auditor ordinarily would replace the voided purchase order with another if the voided purchase order,Represents office equipment ordered and never received.,Has been properly voided in the normal course of business.,Represents office equipment ordered and canceled before being processed by the vendor.,Has been electronically deleted from the purchase order file.,B
An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following?,The planned level of control risk.,Management’s assertions that internal controls exist and are operating efficiently.,The effectiveness of internal controls.,The planned level of assurance at the relevant assertion level.,D
Mill CPA was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modern Co. regarding Modern's written assertion about its compliance with contractual requirements to pay royalties. Mill's report on these agreed-upon procedures should contain a(an),Disclaimer of opinion about the fair presentation of Modern's financial statements.,List of the procedures performed (or reference thereto) and Mill's findings.,Opinion about the effectiveness of Modern's internal control activities concerning royalty payments.,Acknowledgment that the sufficiency of the procedures is solely Mill's responsibility.,B
"Simmons gives her child a gift of publicly traded stock with a basis of $40,000 and a fair market value of $30,000. No gift tax is paid. The child subsequently sells the stock for $36,000. What is the child’s recognized gain or loss, if any?","$4,000 loss.",No gain or loss.,"$6,000 gain.","$36,000 gain.",B
Goll Co. has a 25% interest in the common stock of Rose Co. and an 18% interest in the common stock of Jave Co. Neither investment gives Goll the ability to exercise significant influence over either company's operating and financial policies. Which of the two investments should Goll account for using the equity method?,Both Rose and Jave.,Rose only.,Jave only.,Neither Rose nor Jave.,D
What is the present value of $10 received in two years’ time if the discount rate is 9%?,$9,$11,$8.26,$8.42,D
Which of the following circumstances generally will cause a discharge of contractual duties by operation of law?,Novation.,Accord and satisfaction.,Anticipatory repudiation.,Impossibility of performance.,D
In searching for unrecorded liabilities an auditor most likely would examine the,Cutoff bank statement for deposits recorded in the books but not by the bank.,"Details of accounts receivable confirmations that are classified as ""exceptions"".",Files of purchase requisitions for items ordered just before the year end.,Receiving reports for items received before year end but not yet recorded.,D
The capital structure of Merritt Co. is 20% common equity and debt equal to 80%. The cost of common equity is 10% and the pretax cost of debt is 5%. Merritt's tax rate is 21%. What is Merritt's weighted-average cost of capital?,5.16%,6.00%,6.98%,7.50%,A
"Greene is the sole shareholder of Seagull, a calendar-year S corporation. Greene's basis at the beginning of the year is $15,000. Seagull reported an ordinary loss of $5,000 and $2,000 of municipal bond interest for the year. Seagull distributed cash of $6,000 to Greene on November 1. What is Greene's basis in Seagull at the end of the year?","$4,000","$6,000","$14,000","$15,000",B
Holt Co. discovered that in the prior year it failed to report $40000 of depreciation related to a newly constructed building. The depreciation was computed correctly for tax purposes. The tax rate for the current year was 20%. How should Holt report the correction of error in the current year?,As an increase in accumulated depreciation of $32000.,As an increase in accumulated depreciation of $40000.,As an increase in depreciation expense of $32000.,As an increase of depreciation expense of $40000.,B
Which of the following factors most likely would cause an accountant not to accept an engagement to compile the financial statements of a nonissuer?,A lack of segregation of duties in the entity's accounting and payroll departments.,Indications that reports of asset misappropriation are not investigated by management.,The entity's intention to omit from the financial statements substantially all of the disclosures required by GAAP.,Management's acknowledgement that the financial statements will be included in a written personal financial plan.,B
Which of the following transactions correctly illustrates the doctrine of substantial performance?,Blair ordered a dozen blue chairs from Kyle but Kyle delivered a dozen red chairs.,Leslie painted an entire room but failed to put the electrical outlet covers back on.,A contract required hair styling to be done to Toby's satisfaction but Toby was in good faith dissatisfied with the completed result.,A dentist competently completed the extraction of Lee's tooth but mistakenly pulled the wrong one.,B
In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling an auditor should consider that,Deviations from pertinent controls do not affect the risk of material misstatement in the accounting records.,Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate.,When the degree of assurance desired in a sample is high the auditor should allow for a high level of sampling risk.,Increasing the number of items selected for the test of controls usually increases the tolerable rate of deviations.,B
"The covariance between Stock A and the market index is 88, while their standard deviations are respectively 19% and 14%. What is the beta of Stock A?",0.24,0.35,0.245,0.45,D
"Summer, a single individual, had a net operating loss of $20,000 three years ago. A Code Sec. 1244 stock loss made up three-fourths of that loss. Summer had no taxable income from that year until the current year. In the current year, Summer has gross income of $80,000 and sustains another loss of $50,000 on Code Sec. 1244 stock. Assuming that Summer can carry the entire $20,000 net operating loss to the current year, what is the amount and character of the Code Sec. 1244 loss that Summer can deduct for the current year?","$35,000 ordinary loss.","$35,000 capital loss.","$50,000 ordinary loss.","$50,000 capital loss.",C
Prior to the issuance of its December 31 financial statements Stark Co. was named as a defendant in a lawsuit arising from an event that occurred in October. Stark's legal counsel believes that it is reasonably possible that there will be an unfavorable outcome and that damages will range from $100000 to $150000. Which amount(s) should Stark accrue and/or disclose in its December 31 financial statements? Accrue contingent liability Disclose contingent liability,$100000 $100000 - $150000,$100000 $150000,$0 $100000 - $150000,$0 $150000,C
Best County's capital projects fund had the following receipts during the year: Transfer from the general fund $100000 Federal capital grant $75000 Special assessment for capital improvements $300000 What amount of revenues should Best County report in its capital projects fund at the end of the year?,"$75,000","$300,000","$375,000",475000,C
"Prior to commencing the compilation of financial statements of a nonissuer, an accountant is required to",Verify that the financial information supplied by the entity agrees with the books of original entry.,Perform preliminary analytical procedures to identify accounts that may represent specific risks relevant to the engagement.,Make inquiries of management concerning the entity's procedures used in adjusting and closing the books of account.,Obtain an understanding of any specialized financial reporting frameworks and practices used in the entity's industry.,D
An audit client has a valid reason for requesting that a certain account receivable that the auditor has selected for confirmation not be confirmed. Under these circumstances the auditor should,Verify the account balance by inspecting the client's bank statements and cash receipt records.,Select at random a different account for confirmation that is approximately the same size.,Request the client's management to document the matter in the management representation letter.,Explain to the client that the request will most likely cause the auditor to disclaim an opinion.,A
Dari Inc. guaranteed the debt of a related party. In December Dari learned that it is probable it will be required to pay between $150000 and $200000 within the next six months in satisfaction of its guarantee but no amount within that range is more likely. What amount of contingent liability should Dari accrue in its December 31 balance sheet?,"$200,000","$175,000","$150,000",0,C
"Which of the following decision-making techniques is most useful to a manager who is attempting to increase the profitability of an area, but who has a problem with limited capacity for operation of a critical machine?",Theory of constraints.,Economic order quantity.,Balanced scorecard.,Cost-variance analysis.,A
"Markson Co. traded a concrete-mixing truck with a book value of $10,000 to Pro Co. for a cement-mixing machine with a fair value of $11,000. Markson needs to know the answer to which of the following questions in order to determine whether the exchange has commercial substance?",Does the book value of the asset given up exceed the fair value of the asset received?,Is the gain on the exchange less than the increase in future cash flows?,Are the future cash flows expected to change significantly as a result of the exchange?,Is the exchange nontaxable?,C
"An analyst expects a company to pay a dividend of $5 with a dividend growth rate of 3%. The inflation rate is expected to fall from 5% per year to 3% per year. As a result of the change in the inflation premium, the company's",Stock price will likely decrease.,Cost of equity will likely remain stable.,Cost of equity will likely decrease.,Stock price will likely remain stable.,C
"The standard deviations of Stocks A and B are respectively 6% and 18%. If their correlation is 0.2 and an equal weighted portfolio is formed, what is the standard deviation of such a portfolio?",10%,5%,3.40%,9.70%,A
Mentor Co. a U.S. corporation owned 100% of a Swiss corporation. The Swiss franc is the functional currency. The remeasurement of Mentor's financial statements resulted in a $25000 gain at year end. The translation of the financial statements resulted in a $40000 gain at year end. What amount should Mentor recognize as foreign currency gain in its income statement?,$0,"$25,000","$40,000",65000,B
"A U.S. manufacturer has a production operation in Mexico. The product costs 116.50 pesos to produce and ship to Europe, where the product sells for 20 euros. If 0.1099 U.S. dollars are required to buy one Mexican peso, and 0.8928 U.S. dollars are required to buy one euro, what amount of U.S. dollars is the profit on the sale?",$5.06,$6.11,$7.20,$9.60,A
Dodd Co.'s debt securities at December 31 included available-for-sale securities with a cost basis of $24000 and a fair value of $30000. Dodd's income tax rate was 20%. What amount of unrealized gain or loss should Dodd recognize in its income statement at December 31?,$6000 loss.,$0,$4800 gain.,$6000 gain.,B
Which of these is true of equity but not of bonds?,They can be issued by firms.,Their payouts (i.e. dividend or coupons) are made after corporation tax has already been deducted.,Their payouts (i.e. dividends or coupons) are made before corporation tax has been deducted.,They can be traded on the secondary market.,B
"Suppose that the market price of Company X is $45 per share and that of Company Y is $30. If X offers three-fourths a share of common stock for each share of Y, the ratio of exchange of market prices would be:",0.667,1,1.125,1.5,C
Which of the following activities is not an element of a CPA firm's quality control system to be considered in establishing quality control policies and procedures?,Deciding whether to accept or continue a client relationship.,Selecting personnel for advancement who have the necessary qualifications.,Assessing a client's ability to establish effective internal controls.,Monitoring the effectiveness of professional development activities.,C
"Strom acquired a 25% interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace?",$0,"$16,000","$26,000","$32,000",A
"Subsequent to issuing a report on audited financial statements, a CPA discovers that the accounts receivable confirmation process omitted a number of accounts that are material, in the aggregate. Which of the following actions should the CPA take immediately?",Bring the matter to the attention of the board of directors or audit committee.,Withdraw the auditor’s report from those persons currently relying on it.,Perform alternative procedures to verify account balances.,Discuss the potential financial statement adjustments with client management.,C
A company sells DVD players for $200 per unit. The players have a unit variable cost of $160. The company estimates that it will sell one home entertainment system for every four DVD players sold. Home entertainment systems have a unit variable cost of $460 and sell for $600 per unit. The company's fixed costs are $90000. Assuming that the sales mix estimate is correct how many DVD players need to be sold for the company to break even?,300,500,1200,1500,C
"Felton Farm Supplies, Inc., has an 8 percent return on total assets of $300,000 and a net profit margin of 5 percent. What are its sales?","$3,750,000.00","$480,000","$300,000","$1,500,000",B
An entity prepares its financial statements on its income tax basis. The accompanying notes include a summary of significant accounting policies that discusses the basis of presentation and describes how that basis differs from GAAP. The dollar amount of the effects of the difference between the income tax basis and GAAP,Is required to be included only in the auditor's report.,Is required to be included only in the notes to the financial statements.,Is required to be included both in the notes to the financial statements and the auditor's report.,Need not be quantified and included in either the notes to the financial statements or the auditor's report.,D
An auditor decides to use the blank form of positive accounts receivable confirmation. The auditor should be aware that the blank form may be ineffective because,All accounts do not have an equal opportunity to be selected for confirmation.,Accounts unconfirmed may have already been written off as uncollectible.,Few responses may occur because more effort is required of recipients.,Accounts actually confirmed may not be representative of the population.,C
Gamma Co. a manufacturer of medical products had a 10% return on assets and an asset turnover of 4:1. What was Gamma's profit margin on sales?,40.00%,10.00%,4.00%,0.025,D
"A company whose stock is trading at $10 per share has 1,000 shares of $1 par common stock outstanding when the board of directors declares a 30% common stock dividend. Which of the following adjustments should be made when recording the stock dividend?",Treasury stock is debited for $300.,"Additional paid-in capital is credited for $2,700.",Retained earnings is debited for $300.,"Common stock is debited for $3,000.",C
An auditor is evaluating a client’s internal controls. Which of the following situations would be the most difficult internal control issue for an auditor to detect?,"The accounting staff neglects the control, due to increased transactions to be processed.","The technology department writes a program that does not properly implement the control, due to a lack of understanding.","Two employees, who work in different departments, are circumventing an internal control.",Someone erroneously disables edit checks in a software program designed to identify control exceptions.,C
"If a five-year bond has a yield of 6% and a ten-year bond has a yield of 5%, what is the yield curve likely to be?",upward sloping,3% at −5,4% at −10,downward sloping,D
"Which of the following, discovered during an audit, most likely would raise a question concerning possible illegal acts?","Related party transactions, although properly disclosed, were pervasive during the year.",The entity prepared several large checks payable to cash during the year.,Material internal control weaknesses previously reported to management were not corrected.,The entity was a campaign contributor to several local political candidates during the year.,B
Under state law Boca Co. may reimburse the state directly for actual unemployment claims or it may pay 3% of eligible gross wages. Boca believes that actual unemployment claims will be 2% of eligible gross wages and has chosen to reimburse the state. Eligible gross wages are defined as the first $15000 of gross wages paid to each employee. Boca had four employees each of whom earned $20000 during the year. What amount should Boca report as accrued liability for unemployment claims in its year-end balance sheet?,"$1,200","$1,600","$1,800",2400,A
"Which of the following procedures would an auditor most likely complete to test the existence assertion of property, plant and equipment?","Obtaining a listing of all current-year additions, vouching significant additions to original invoices, and determining that they have been placed in service.",Obtaining a detailed fixed-asset register and ensuring items are appropriately capitalized.,Obtaining a listing of current-year additions and verifying that items are recorded in the proper period.,Obtaining a detailed fixed-asset register and ensuring depreciation methods are applied consistently.,A
"An auditor may provide an issuer client any of the following nonaudit services without impairing independence and without obtaining the preapproval of the audit committee, except",Nonaudit services with revenues in aggregate of less than 5% of the total revenues paid by the issuer to the auditor during the fiscal year in which the nonaudit services are provided.,"Nonaudit services that were promptly brought to the attention of, and approved by, the audit committee prior to the completion of the audit.",Nonaudit services to perform financial information systems design and implementation.,Services that the issuer did not recognize as nonaudit services at the time of the engagement.,C
Which of the following applies to an accountant conducting a review of interim financial information?,The accountant must indicate in the report those circumstances in which generally accepted accounting principles have not been consistently observed in the current period in relation to the preceding period.,The accountant must express an opinion on the financial statements taken as a whole.,The accountant must maintain independence in mental attitude in all matters relating to the engagement.,The accountant must obtain sufficient appropriate evidence by performing procedures to afford a reasonable basis for an opinion.,C
Parent gave securities with an adjusted basis of $10000 and fair market value of $9000 to a child. Later the child sold the securities for $7000. What is the child's basis for the securities sold?,"$10,000","$9,000","$7,000",0,B
A CPA was engaged to calculate the rate of return on a specified investment according to an agreedupon formula and verify that the resultant percentage agrees to the percentage in an identified schedule. The CPA's report on these agreed-upon procedures should contain,An opinion about the fairness of the agreed-upon procedures.,A separate paragraph describing the effectiveness of the internal controls.,A disclaimer of responsibility for the sufficiency of those procedures.,A disclaimer of opinion on the fair presentation of the financial statements.,C
When comparing investment projects:,The ranking of projects by NPV is invariant to changes in the market rate,The IRR will always agree with NPV metric,The IRR never changes the ranking of the projects,"We should use a single metric, like the NPV or the IRR, to have a coherent comparison",C
According to rules issued under the Sarbanes-Oxley Act which of the following nonaudit services is an accounting firm permitted to provide for an issuer audit client without impairing the accounting firm's independence?,Providing an expert opinion in order to advocate the client's interest in litigation.,Providing an expert opinion in order to advocate the client's position in a regulatory investigation.,Providing factual accounts in testimony explaining positions taken during the performance of any services provided to the client.,Providing legal services to the client in a foreign jurisdiction.,C
Match Co. manufactures a product with the following costs per unit based on a maximum plant capacity of 400000 units per year: Direct materials $ 60 Direct labor 10 Variable overhead 40 Fixed overhead 30 Total $140 Match has a ready market for all 400000 units at a selling price of $200 each. Selling costs in this market consist of $10 per unit shipping and a fixed licensing fee of $50000 per year. Reno Co. wishes to buy 5000 of these units on a special order. There would be no shipping costs on this special order. What is the lowest price per unit at which Match should be willing to sell the 5000 units to Reno?,$110,$140,$190,200,C
Pine Co. purchased land for $450000 as a factory site. An existing building on the site was razed before construction began. Additional information is as follows: Cost of razing old building $60000 Title insurance and legal fees to purchase land $30000 Architect's fees $95000 New building construction cost $1850000 What amount should Pine capitalize as the cost of the completed factory building?,"$2,005,000","$1,975,000","$1,945,000",1910000,C
"A company has a parcel of land to be used for a future production facility. The company applies the revaluation model under IFRS to this class of assets. In year 1, the company acquired the land for $100,000. At the end of year 1, the carrying amount was reduced to $90,000, which represented the fair value at that date. At the end of year 2, the land was revalued, and the fair value increased to $105,000. How should the company account for the year 2 change in fair value?","By recognizing $10,000 in other comprehensive income.","By recognizing $15,000 in other comprehensive income.","By recognizing $15,000 in profit or loss.","By recognizing $10,000 in profit or loss and $5,000 in other comprehensive income.",D
A 20% target contribution margin is set for Duct which is a new product with the following unit costs: Manufacturing costs Variable $12 Fixed 8 Selling & admin. Costs Variable $3 Fixed 5 What is Duct's target selling price?,$18.00,$18.75,$25.00,33.6,B
"A company last paid a dividend of $3. If the expected return on its equity is estimated at 12% and its shares are currently quoted on London Stock Exchange at $75, what should the dividend growth rate be to ensure that the price is consistent with the pricing of a growing perpetuity?",0%,8%,16%,-4%,B
Financial statements prepared by a voluntary health and welfare nongovernmental not-for-profit organization must report expenses by the following classification(s): Functional Natural,Yes Yes,Yes No,No Yes,No No,A
"For an individual business owner, which of the following would typically be classified as a capital asset for federal income tax purposes?",Accounts receivable,Marketable securities,Machinery and equipment used in a business,Inventory,B
"According to COSO, which of the following is the most effective method to transmit a message of ethical behavior throughout an organization?",Demonstrating appropriate behavior by example.,Strengthening internal audit’s ability to deter and report improper behavior.,"Removing pressures to meet unrealistic targets, particularly for short-term results.",Specifying the competence levels for every job in an organization and translating those levels to requisite knowledge and skills.,A
Bailey Co. changed the accounting for insurance expense from the cash basis to the accrual basis in the current year. In January of the prior year Bailey recorded insurance expense of $240000 for the cash purchase of a four-year insurance policy. How should Bailey report the insurance transaction in the current year's financial statements?,As a $180000 debit to prepaid insurance.,As a $60000 debit to insurance expense.,As a $60000 debit to insurance expense a $120000 debit to prepaid asset and $180000 credit to retained earnings.,As a $180000 debit to insurance expense a $120000 credit to prepaid asset and $60000 credit to retained earnings.,C
A company is considering a move to a Software-as-a-Service (SaaS) offering instead of a traditional in-house application. Which of the following concerns is unique to SaaS?,Disaster recovery capabilities and documented recovery procedures.,User credential setup and control over the actions that employees can perform.,Allocation of software expenses and overhead charged to departments.,Ownership of processed data and costs of data migrations.,D
"Which of the following situations would not impair objectivity, integrity, or independence with respect to an audit client?",An auditor takes the client’s audit committee to Las Vegas for the weekend.,An out-of-town client takes the audit engagement team out to dinner at a renowned local restaurant.,An auditor provides client management with box seats for the season at a major league baseball franchise.,A client takes the audit engagement team on a two-day ski trip after the audit team worked for two consecutive weekends.,B
Which of the following procedures should a user auditor include in the audit plan to create that most efficient audit when an audit client uses a service organization for several processes?,Review that service auditor’s report on controls placed in operations.,Review the service auditor’s report and outline the accounting system in a memo to the working papers,"Audit the service organization’s controls, assess risk, and prepare the audit plan.",Audit the service organization’s controls to test the work of the service auditor.,A
In the current year Vinton exchanged unimproved land for an apartment building. The land had a basis of $300000 and a fair market value (FMV) of $420000 and was encumbered by a $100000 mortgage. The apartment building had an FMV of $550000 and was encumbered by a $230000 mortgage. Each party assumed the other's mortgage. What is Vinton's basis in the office building?,"$300,000","$320,000","$430,000",550000,C
"When the operating effectiveness of a control is not evidenced by written documentation, an auditor should obtain evidence about the control’s effectiveness by",Mailing confirmations.,Inquiry and other procedures such as observation.,Analytical procedures.,Recalculating the balance in related accounts.,B
Lake Trust a simple trust reported the following items of income and expense during the year: Dividend income $2500 Taxable interest income 2000 Capital gains (allocable to corpus) 5000 Accounting fees (allocable to income) (500) Trustee fees (allocable to income) (750) What is Lake's distributable net income?,"$9,500","$8,250","$5,000",3250,D
An auditor of a nonissuer may not issue a qualified opinion when,The auditor lacks independence with respect to the entity.,Management prevents the auditor from observing the entity's inventory.,The entity omits the statement of cash flows from its financial statements.,The auditor's report refers to the work of an actuary.,A
Which of the following factors most likely would be considered an inherent limitation to an entity's internal control?,The ineffectiveness of the entity's audit committee.,Collusion of employees in circumventing internal controls.,The lack of resources to monitor internal controls.,The complexity of the entity's electronic order processing system.,B
"The Houser Company has negotiated a $500,000 revolving credit agreement with Chitwood National Bank. The agreement calls for an interest rate of 10% on fund used, a 15% compensating balance, and a commitment fee of 1% on the unused amount of the credit line. Assuming that the compensating balance would not otherwise be maintained, the effective annual interest cost if the firm borrows $200,000 for one year is closest to",11.5 percent.,15 percent.,26.5 percent.,13.53 percent.,D
"Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The $100,000 should be",Allocated on a pro rata basis to the nonmonetary assets acquired.,Capitalized as part of goodwill and tested annually for impairment,Capitalized as an other asset and amortized over five years.,Expensed as incurred in the current period,D
Smith Legal Services has offered to represent a plaintiff in a lawsuit for a retainer of $20000 plus 40% of any award over $20000. Smith expects to incur out-of-pocket expenditures of $15000 in litigating the suit. Possible court awards with their associated probabilities are: Award Probability $100000 0.7 $0 0.3 What is the expected value to Smith of the lawsuit?,"$25,900","$27,400","$33,000",37000,B
"A bond with a five-year maturity, paying 8% coupons and with a face value of $100, is bought at 104.1 in year 0, when it is issued. If I need to sell the bond at the the end the third year, when its prevailing price is 82, what is my holding period return on this investment? (Assume coupons are not reinvested.) HINT: Accumulate all coupons.",24%,23%,-21%,2%,D
"What is the value of the tax shield if the value of the firm is $5 million, its value if unlevered would be $4.78 million, and the present value of bankruptcy and agency costs is $360,000?","$140,000","$220,000","$360,000","$580,000",D
"A CPA prepares income tax returns for a client. After the client signs and mails the returns, the CPA discovers an error. According to Treasury Circular 230, the CPA must",Document the error in the workpapers.,Prepare an amended return within 30 days of the discovery of the error.,Promptly advise the client of the error.,Promptly resign from the engagement and cooperate with the successor accountant.,C
An auditor is using statistical sampling in testing whether cash disbursements were properly authorized. The sample results indicate that the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate. Under these circumstances the auditor most likely would reduce the,Planned reliance on the prescribed control.,Assessed level of control risk.,Planned reliance on substantive tests.,Tolerable rate of deviations.,A
When assessing an internal auditor's objectivity an independent auditor should,Perform tests of controls to determine whether significant internal control activities are properly maintained.,Analyze the risk factors that relate to misstatements arising from the misappropriation of assets.,Review the internal auditor's reports to verify that the conclusions reached are consistent with the procedures performed.,Consider the policies that prohibit the internal auditor from auditing areas where relatives are employed in key management positions.,D
In the statement of activities for a governmental entity revenues such as charges for building permits garbage collection and dog licenses are reported as which of the following?,Program revenues in the category ‚ÄúCapital Grants and Contributions.‚Äù,Program revenues in the category ‚ÄúCharges for Services.‚Äù,General revenues in the category ‚ÄúCharges for Services.‚Äù,General revenues in the category ‚ÄúCapital Grants and Contributions.‚Äù,B
How would the following ratios or measures be affected if a company issued additional capital stock for cash? Total debt to total assets Working capital,Increase Increase,Increase Decrease,Decrease Increase,Decrease Decrease,C
Which of the following statements is the most significant characteristic in determining the classification of an enterprise fund?,The predominant customer is the primary government.,The pricing policies of the activity establish fees and charges designed to recover its cost.,The activity is financed by debt that is secured partially by a pledge of the net revenues from fees and charges of the activity.,Laws or regulations require that the activity’s costs of providing services including capital costs be recovered with taxes or similar revenues.,B
"Rune Co.'s checkbook balance on December 31 was $10000. On that date Rune held the following items in its safe: $4000 check payable to Rune postdated January 3 and not included in the December 31 checkbook balance in collection of a sale made in December. $1000 check payable to Rune deposited December 15 and included in the December 31 checkbook balance but returned by the bank on December 30 stamped ""NSF"". The check was redeposited on January 2 and cleared on January 9. What amount should Rune report as cash in its December 31 balance sheet?","$9,000","$10,000","$13,000",14000,A
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?,Verify inventory pledged under loan agreements by confirming the details with financial institutions.,Inquire about the current status of transactions that were recorded on the basis of preliminary data.,Compare the financial statements being reported on with those of the prior year.,Trace information from shipping documents to sales invoices and sales journal transactions.,B
The following information pertains to Baxter Co: Inventory at beginning of year $200000 Inventory at year end $300000 Cost of goods sold during the year $500000 What was Baxter's inventory turnover for the year?,1,1.5,2,2.5,C
"In planning an audit, the auditor's knowledge about the design of relevant internal control activities should be used to",Identify the types of potential misstatements that could occur.,Assess the operational efficiency of internal control.,Determine whether controls have been circumvented by collusion.,Document the assessed level of control risk.,A
Prime Corp. is an accrual-basis calendar-year C corporation. Its current-year reported book income before federal income taxes was $300000 which included $17000 corporate bond interest income. A $20000 expense for term life insurance premiums on corporate officers was incurred. Prime was the policy owner and beneficiary. What was Prime's current-year taxable income as reconciled on Prime's Schedule M-1 Reconciliation of Income (Loss) per Books With Income per Return of Form 1120 U.S. Corporation Income Tax Return?,"$320,000","$300,000","$283,000",280000,A
"If the correlation between Securities A and B is −0.20, and their respective standard deviations are 8% and 18%, what is the standard deviation of a portfolio with one quarter invested in A and three quarters invested in B?",8.70%,13.20%,54%,6.60%,B
During the current year Cooley Co. had an unrealized gain of $100000 on a debt investment classified as available-for-sale. Cooley's corporate tax rate is 25%. What amount of the gain should be included in Cooley's net income and other comprehensive income at the end of the current year? Net income Other comprehensive income,$100000 $0,$75000 $25000,$25000 $75000,$0 $75000,D
"You are told an investment will generate income that grows at 5% p.a. forever when the market discount rate is 15%. If the investment’s next payout is $10, what is the value of the investment?",$1,$500,$100,$200,C
Which of the following matters is included in a typical comfort letter?,Negative assurance on whether unaudited condensed financial information complies in form with the accounting requirements of the SEC.,An opinion on whether any fraud risk factors indicate significant incentive and opportunity relating to fraudulent financial reporting.,Positive assurance on whether there has been any change in capital stock or long-term debt since the date of the audited financial statements.,An opinion on whether the entity's internal control components are operating as designed in achieving their stated objectives.,A
Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements arising from fraudulent financial reporting?,Management displays a significant disregard for regulatory authorities.,There is a lack of turnover of employees in the accounting department.,Monthly bank reconciliations usually include several deposits in transit.,Equipment is usually sold at a loss before being fully depreciated.,A
The primary purpose of a not-for-profit organization's statement of activities is to provide relevant information to its,Resource providers.,Managers.,Beneficiaries.,State regulatory body.,A
"Kanji Company had sales last year of $265 million, including cash sales of $25 million. If its average collection period was 36 days, its ending accounts receivable balance is closest to . (Assume a 365-day year.)",$26.1 million,$23.7 million,$7.4 million,$18.7 million,B
"Palmyra Co. has net income of $11,000, a positive $1,000 net cumulative effect of a change in accounting principle, a $3,000 unrealized loss on available-for-sale securities, a positive $2,000 foreign currency translation adjustment, and a $6,000 increase in its common stock. What amount is Palmyra’s comprehensive income?","$4,000","$10,000","$11,000","$17,000",B
"On October 31, year 1, a company with a calendar year-end paid $90,000 for services that will be performed evenly over a sixmonth period from November 1, year 1, through April 30, year 2. The company expensed the $90,000 cash payment in October, year 1, to its services expense general ledger account. The company did not record any additional journal entries in year 1 related to the payment. What is the adjusting journal entry that the company should record to properly report the prepayment in its year 1 financial statements?","Debit prepaid services and credit services expense for $30,000.","Debit prepaid services and credit services expense for $60,000.","Debit services expense and credit prepaid services for $30,000.","Debit services expense and credit prepaid services for $60,000.",B
Which of the following should a practitioner perform as part of an engagement for agreed-upon procedures in accordance with Statements on Standards for Attestation Engagements?,Issue a report on findings based on specified procedures performed.,Assess whether the procedures meet the needs of the parties.,Express negative assurance on findings of work performed.,Report the differences between agreed-upon and audit procedures.,A
Which of the following types of information would be included in total net assets in the statement of financial position for a nongovernmental not-for-profit organization?,Total current net assets and total other assets.,Total current assets and restricted assets.,"Unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets.","Unrestricted net assets, restricted net assets, and total current assets.",C
"According to the Bond Equivalent Yield (BEY) method, the yield on a $1,000, 13-week US Treasury bill purchased for $960 would be closest to .",16.0 percent,16.7 percent,17.0 percent,17.8 percent,B
"Joe is the trustee of a trust set up for his father. Under the Internal Revenue Code, when Joe prepares the annual trust tax return, Form 1041, he",Must obtain the written permission of the beneficiary prior to signing as a tax return preparer.,Is not considered a tax return preparer.,May not sign the return unless he receives additional compensation for the tax return.,Is considered a tax return preparer because his father is the grantor of the trust.,B
"A nongovernmental, not-for-profit organization held the following investments:
Investment Cost, Fair value (beginning of year), Fair value (end of year)
Stock A (100 shares), $50 per share, $45, $51
Stock B (200 shares), $40 per share, $41, $49
What amount of stock investments should be reported in the year-end statement of financial position?","$12,700","$13,000","$13,800","$14,900",D
Strut Co. has a payable to its parent Plane Co. In which of the following balance sheets should this payable be reported separately? Strut's Plane's consolidated balance sheet balance sheet,Yes Yes,Yes No,No Yes,No No,B
An entity prepares its financial statements on the income tax basis. A description of how that basis differs from GAAP should be included in the,Notes to the financial statements.,Auditor’s engagement letter.,Management representation letter.,Introductory paragraph of the auditor’s report.,A
"Lind Co.'s salaries expense of $10,000 is paid every other Friday for the 10 workdays then ending. Lind's employees do not work on Saturdays and Sundays. The last payroll was paid on June 18. On Wednesday, June 30, the month-end balance in the salaries expense account before accruals was $14,000. What amount should Lind report as salaries expense in its income statement for the month ended June 30?","$24,000","$22,000","$20,000","$18,000",B
Which of the following statements is correct as it relates to changes in accounting estimates?,Most changes in accounting estimates are accounted for retrospectively.,"Whenever it is impossible to determine whether a change in an estimate or a change in accounting principle occurred, the change should be considered a change in principle.","Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate.",It is easier to differentiate between a change in accounting estimate and a change in accounting principle than it is to differentiate between a change in accounting estimate and a correction of an error.,C
A partner in a general partnership is usually not entitled to which of the following?,To participate in management.,To review accounting records.,To enter into a contract with a third party without the consent of the other partners.,To be liable only for personal negligence.,D
Which of the following matters does an auditor usually include in the engagement letter?,Arrangements regarding fees and billing.,Analytical procedures that the auditor plans to perform.,Indications of negative cash flows from operating activities.,Identification of working capital deficiencies.,A
"In the financial statements of employee benefit pension plans and trusts, the plan investments are reported at",Fair value.,Historical cost.,Net realizable value.,Lower of historical cost or market.,A
"An accountant compiles the financial statements of a nonissuer and issues the standard compilation report. Although not specifically stated in this report, it is implied that",The accountant has not audited or reviewed the financial statements.,Substantially all disclosures required by GAAP are included in the financial statements.,The financial statements should not be used to obtain credit.,The compilation is limited to presenting information that is the representation of management.,B
"Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite Company common stock has a beta of 1.80. The expected return on the market is 10 percent, and the risk-free rate is 6 percent. According to the capital-asset pricing model (CAPM) and making use of the information above, the required return on Plaid Pants' common stock should be , and the required return on Acme's common stock should be .",3.6 percent; 7.2 percent,9.6 percent; 13.2 percent,9.0 percent; 18.0 percent,14.0 percent; 23.0 percent,B
"A company invested in a new machine that will generate revenues of $35,000 annually for seven years. The company will have annual operating expenses of $7,000 on the new machine. Depreciation expense, included in the operating expenses, is $4,000 per year. The expected payback period for the new machine is 5.2 years. What amount did the company pay for the new machine?","$145,600","$161,200","$166,400","$182,000",C
Which of the following items is not subject to the application of intraperiod income tax allocation?,Discontinued operations,Income from continuing operations.,Extraordinary gains and losses,Operating income.,D
Skytop Co. a nonprofit entity is considering acquiring a machine for $80000 that will produce uniform cash inflows of $25000 for four years. Skytop evaluates capital projects using discounted cash flows at a cost of capital of 10% per year. Based upon the following table what action should Skytop take regarding acquisition of the machine and why? Future value of $1 for 4 years at 10% $1.464 Present value of $1 for 4 years at 10% $0.683 Future value of $1 ordinary annuity for 4 years at 10% $4.641 Present value of $1 ordinary annuity for 4 years at 10% $3.170 Acquire: Reason:,Yes Net cash flow is $20000,Yes Net future value is $36025,No Net present value is ($750),No Net present value is ($8750),C
"In return for a 20% partnership interest, Skinner contributed $5,000 cash and land with a $12,000 basis and a $20,000 fair market value to the partnership. The land was subject to a $10,000 mortgage that the partnership assumed. In addition, the partnership had $20,000 in recourse liabilities that would be shared by partners according to their partnership interests. What amount represents Skinner’s basis in the partnership interest?","$27,000","$21,000","$19,000","$13,000",D
"A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month?","$185,000","$190,000","$195,000","$200,000",B
Stone Co. had the following consignment transactions during December year 1: Inventory shipped on consignment to Omega Co. $36000 Freight paid by Stone $1800 Inventory received on consignment from Gamma Co. $24000 Freight paid by Gamma $1000 No sales of consigned goods were made through December 31 year 1. What amount of consigned inventory should be included in Stone's December 31 year 1 balance sheet?,"$24,000","$25,000","$36,000",37800,D
Dawn Corp. uses a standard cost system. During the year both the labor rate variance and the labor efficiency variance were unfavorable. Dawn wrote the variances off directly to cost of goods sold. If Dawn had allocated the variances to work in process finished goods and cost of goods sold instead what would have been the effects on current ratio and net income? Current Net ratio income,Increases Increases,Increases Decreases,Decreases Increases,Decreases Decreases,A
"While performing certain nonaudit services for an insurance company, a professional accountant is asked to recommend the appropriate accounting treatment for a weather hedge transaction. The accountant has worked with financial hedges but has no experience with weather hedges. Which of the following actions by the accountant would be in compliance with the IFAC Code of Ethics for Professional Accountants?",Agree to recommend the appropriate accounting treatment after performing sufficient research on weather hedges.,"Refuse to conduct the research and make a recommendation, because of insufficient experience.","Refuse to conduct the research and make a recommendation, because of a conflict of interest.",Agree with the accounting treatment recommended by the company’s hedge fund trader.,A
Rigg Steele and Urco Corps. all accrual-basis calendar-year C corporations have only voting common stock outstanding. Rigg owns 85 percent of Steele and 40 percent of Urco. Steele owns 50 percent of Urco. Which group of corporations qualifies as an affiliated group and may join in the filing of a consolidated federal income tax return?,Rigg and Urco.,Urco and Steele.,Rigg Steele and Urco.,An affiliated group does not exist.,C
"A CPA has been requested by a former audit client to reissue the auditor's report for the prior period. Before reissuing the report, the CPA should",Obtain a letter of representation from the former client's management.,Make inquiries of the former client's attorney regarding pending litigation.,Review the former client's records to verify its compliance with debt and loan agreements.,Consider whether there is substantial doubt about the former client's ability to continue as a going concern.,A
A government entity is required to include a statement of cash flows in which of the following financial statements?,Governmental fund financial statements.,Government-wide financial statements.,Proprietary fund financial statements.,Fiduciary fund financial statements.,C
In which of the following situations would there be inelastic demand?,A 5% price increase results in a 3% decrease in the quantity demanded.,A 4% price increase results in a 6% decrease in the quantity demanded.,A 4% price increase results in a 4% decrease in the quantity demanded.,A 3% price decrease results in a 5% increase in the quantity demanded.,A
Bay Co. incurred legal fees in defending its patent rights. These legal fees should be capitalized when the outcome of the litigation is Successful Unsuccessful,Yes Yes,Yes No,No No,No Yes,B